Resolving Supply-Demand Imbalance with Third-Party Liquidity... Stabilizing Volatile Carbon Emission Allowance Prices

Price Volatility Due to Concentrated Trading Among Allocation Companies

More Transactions Lead to Accumulated Information
Accurate Price Evaluation Expected

Holding Limit of 20t per Securities Firm
Plans for Gradual Expansion Ahead

[Sejong=Asia Economy Reporter Joo Sang-don] The Ministry of Environment has been cautious about allowing third-party participation in the carbon emissions trading market. Minister of Environment Han Jeong-ae also stated, "It is necessary to gather industry opinions on whether to support third-party trading even if prices rise sharply," without taking a definitive stance. However, the decision to lean toward permitting it is interpreted as a judgment that the drawbacks of direct carbon emissions trading between parties are significant.

Above all, there was a strong will to stabilize the carbon emissions trading market by supplying liquidity. Currently, most trades occur between emission allowance allocation companies, and because transactions tend to cluster at times when emission obligations must be fulfilled, price fluctuations are repeated. Therefore, it was judged that increasing liquidity through third parties who trade allowances for investment purposes would be effective in stabilizing prices.

According to the Korea Exchange's emissions market information platform on the 1st, the 2021 vintage carbon emission allowance (KAU21) is priced at 28,000 KRW per ton. This is 6,700 KRW higher than on the 2nd of last month (21,300 KRW). In about a month, the allowance price rose by 31.5%.

Carbon emission allowance prices have been repeatedly volatile. Starting at 23,000 KRW on January 4 this year, the price dropped to 17,150 KRW on the 21st, then rose to 20,200 KRW on March 30. Afterward, it fell to 15,400 KRW on April 19 and was sold at 20,850 KRW on July 30. This year alone, allowance prices have fluctuated widely from 11,550 KRW (June 23) to 29,500 KRW (August 25).

The Ministry of Environment views the main cause of such price volatility as supply-demand imbalances due to insufficient trading volume. When prices rise, quantities are withheld, and when prices fall, a flood of supply emerges, increasing volatility.

For this reason, the Ministry expects that supplying liquidity through third parties will have a significant price stabilization effect. A Ministry of Environment official said, "There are frequent cases where prices surge when companies lacking allowances try to buy, or prices plunge when companies try to sell excess allowances," adding, "Allowances held by third parties will increase the circulating volume in the market, helping to alleviate temporary supply-demand imbalances."

More accurate evaluation of carbon emission allowance prices is also anticipated. Hwang Se-woon, Senior Research Fellow at the Korea Capital Market Institute, explained, "If third parties participating for investment purposes, rather than allocation companies required to hold a certain amount of allowances, join the market, trading demand will increase, making transactions more active," and "The more frequent the trading, the more information is reflected in the allowance prices, leading to more accurate price evaluations."

Originally, third-party participation in carbon emissions trading was included in the Ministry of Environment's ‘3rd Basic Plan for Emissions Trading’ established and announced at the end of 2019. However, concerns were raised that if third parties buy allowances cheaply and sell them at higher prices, prices might surge, or that liquidity could shrink if they only buy in anticipation of price increases. As a result, a fundamental review was initiated.

The Ministry of Environment conducted opinion gathering mainly among allowance allocation companies regarding the introduction of the system. A Ministry official explained, "Companies commonly expressed that liquidity expansion is more urgent and that the 200,000-ton limit per third party would reduce concerns about price surges." He added, "While it is inevitable that allowance prices will gradually rise in the process of achieving carbon neutrality, there is greater expectation that liquidity supplied by third-party participation will contribute to price stabilization." As of the 31st of last month, the largest market in the world, the European carbon emission allowance, was traded at 60.51 euros per ton (approximately 82,758 KRW). It remains nearly three times more expensive than in Korea, and there are forecasts it could rise to 110 euros by the end of the year. This suggests that domestic allowance prices are also likely to trend upward in the long term.

The Ministry of Environment plans to gradually expand the current holding limit of 200,000 tons per securities firm if positive effects such as liquidity supply are confirmed after third-party trading participation. It is also considering allowing ‘consignment trading,’ where securities firms trade surplus allowances on behalf of allocation companies, and indirect investment through exchange-traded funds (ETFs) for individuals.

This content was produced with the assistance of AI translation services.